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VIDEOThe Secrets to Successful Trading: An Interview with Smita Sadana, Part 2
By
Damien Hoffman Aug 07, 2009 12:20 pm
One of the greatest individual traders on Wall Street reveals how she got there.
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Damien Hoffman: What signals are you looking for to know whether clear and sunny skies are here again in the markets?
Smita Sadana: I conducted a deep study of how bear markets have ended in the past 100 years. The results are summarized in Minyanville's Bull Market Timer. I use these signals to show the way as the market turns. I’ve also been writing about this in Minyanville's Buzz & Banter. Again, so long as you trade with very strong money-management rules, you can venture out.
For example, I have a money-management rule I never break: I don’t hold a stock during its earnings announcement. I prefer to sell prior to earnings and repurchase if I like what I hear and see. As Donald Rumsfeld says, “We’re trying to reduce the unknown unknown factor.”
Basically, there’s a known unknown and then an unknown unknown. For example, we know the known unknowns: We know we cannot know where a certain stock is headed or how earnings will be on the known date for earnings. So, we can take care of the known aspect of the stock trading. What we cannot do is control the unknown unknowns. For example, if a biotech company says a certain drug had adverse consequences, we cannot control that. So, to reduce the risk in these situations, we can avoid trading biotech companies or holding stocks during earnings announcements. Damien: Seems like a major factor here is discipline. You’re known for having extraordinary discipline as a trader. Discipline is a rare and challenging skill to maintain. Where did you learn to be disciplined?
Smita: While I’ve naturally tried to be disciplined throughout my life, I recognize trading requires a degree of discipline that most other habits do not. Think of trading as a war: We deal with a constant flow of information and we must manage our reactions, expectations, and emotions. We must be constantly aware of what’s happening and cannot let our guard down. If we get hurt, we must rely on resilience to bounce back as if nothing’s happened.
Such action, day in and day out over the course of many years, is very difficult. As I said earlier, a slight breach of discipline in trading can unleash financial havoc. I wonder if the Trading Gods know about these rules since minor infractions don’t go unpunished! I’ve also constantly used disciplinary techniques from Behavioral Economics, Psychology, and personal trading experiences. As a side point, I majored in Psychology and Economics while getting my Bachelor’s degree.
Discipline is incredibly important because, as I said earlier, nobody’s looking over your shoulder. There’s no agency with which you can launch a complaint like “The stock wasn’t meant to go down -- it came out with great earnings!” You can only react as an individual -- which means discipline is your only protection.
Also, I don’t engage in a relentless pursuit of perfection when it comes to trading discipline. We all know perfection doesn’t work in trading! I think consistent discipline can be maintained so long as lapses in discipline are minor, trading mistakes aren’t compounded by staying with them, and the trader’s ability isn’t seriously impacted.In reality, trading has taught me more about discipline rather than the other way around. At times, you walk. At times, you run. Sometimes you sit by the side of the road. But at no point can you lose sight of your destination. As Edmund Hilary said, “It is not the mountain we conquer but ourselves.” I find myself rigorously doing things to hone my discipline so my trading can be positively impacted. If you want to succeed at trading, first dust off those New Year’s resolutions and see them through December 31!
No positions in stocks mentioned.
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